CHAPTER 1: CONCEPT OF AND NEED FOR ASSURANCE

Question 1

Assurance engagement

Answer 1

practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria

Question 2

The key elements of an assurance engagement are as follows:

Answer 2

• three people or groups of people involved
• a subject matter
• suitable criteria
• sufficient appropriate evidence to support the assurance opinion
• A written report in appropriate form

Question 3

1. Three people or groups of people involved:

Answer 3

• the practitioner (accountant)
• the intended users
• the responsible party (the person(s) who prepared the subject matter)

Question 4

2. A subject matter:

Answer 4

• data (for example, financial statements or business projections)
• dystems or processes (for example, internal control systems or computer systems)
• behaviour (for example, social and environmental performance or corporate governance)

Question 5

3. Suitable criteria:

Answer 5

• The person providing the assurance must have something by which to judge whether the information is reliable and can be trusted.
• The practitioner will be able to test whether the financial statements have been put together in accordance with accounting standards, and if they have, then the practitioner can conclude that there is a degree of assurance that they are reliable.

Question 6

4. Sufficient appropriate evidence to support the assurance opinion:

Answer 6

The practitioner must substantiate the opinion that he draws in order that the user can have confidence that it is reliable. The practitioner must obtain evidence as to whether the criteria have been met

Question 7

A written report in appropriate form

Answer 7

assurance reports are provided to the intended users in a written form and contain certain specified information, ensures that key information is being given and that the assurance given is clear and unequivocal

Question 8

Reasonable assurance:

Answer 8

A high level of assurance, that is less than absolute assurance, that engagement risk has been reduced to an acceptably low level, which then allows a conclusion to be expressed positively.

Question 9

Limited assurance:

Answer 9

A meaningful level of assurance, that is more than inconsequential but is less than reasonable assurance, that engagement risk has been reduced to an acceptable level, which then allows a conclusion to be expressed negatively.

Question 10

The key differences between the two types of assurance engagement”

Answer 10

• the evidence obtained

- the type of opinion given

Question 11

Reasonable assurance (high level):

Answer 11

Evidence sought: Sufficient and appropriate

Conclusion given: Positive wording

Question 12

Limited assurance (moderate level)

Answer 12

Evidence sought: Sufficient and appropriate (lower level)

Conclusion given: Negative wording

Question 13

Users

Answer 13

• the users were the shareholders of a company, to whom the financial statements are addressed
• the board of directors of a company or a subsection of them

Question 14

Benefits of assurance

Answer 14

the independent, professional verification being given to the users

Question 15

assurance may have subsidiary benefits

Answer 15

• give additional confidence to other parties in a way that benefits the business, it enhances the credibility of the information
• prevent errors or frauds being made and reduce the risk of management bias
• problems exist within information, the existence of an assurance report draws attention to the deficiencies in that information
• ensure that high quality, reliable information exists, leading to effective markets that investors have faith in and trust
• Corporate responsibility or sustainability reports provide assurance for stakeholders that this published information is reliable and accurate.

Question 16

Limitations of assurance:

Answer 16

• the auditors do not oversee the process of building the financial statements from start to finish
• accounting systems on which assurance providers may place a degree of reliance also have inherent limitations
• most audit evidence is persuasive rather than conclusive
• providers would not test every item in the subject matter
• client’s staff members may collude in fraud that can then be deliberately hidden from the auditor or misrepresent matters to them for the same purpose
• assurance provision can be subjective and professional judgements have to be made
• assurance providers rely on the responsible party and its staff to provide correct information, which in some cases may be impossible to verify by other means.
• some items in the subject matter may be estimates and are therefore uncertain
• the nature of the assurance report might itself be limiting

Question 17

The expectations gap

Answer 17

• users are not aware of the nature of the limitations on assurance provision
• The distinction between reasonable and limited assurance may also be misunderstood by users
• there is a gap between what the assurance provider understands he is doing and what the user of the information believes he is doing.
• Assurance providers need to close this gap as far as possible in order to maintain the value of the assurance provided for the user

Question 18

Audit of financial statements

Answer 18

enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

Question 19

True:

Answer 19

Information is factual and conforms with reality, not false. In addition the information conforms with required standards and law. The accounts have been correctly extracted from the books and records.

Question 20

Fair:

Answer 20

Information is free from discrimination and bias in compliance with expected standards and rules. The accounts should reflect the commercial substance of the company’s underlying transactions.

Question 21

The Companies Act 2006 also sets out factors which make a person ineligible for being a company auditor

Answer 21

• an officer or employee of the company
• a partner or employee of such a person
• any partner in a partnership in which such a person is a partner
• ineligible by the above for appointment as auditor of any directly connected companies

Question 22

The FRC issues the following standards and guidance for auditing

Answer 22

• auditing standards
• ethical standards for Auditors
• practice notes
• bulletins
• standards for reviews of financial information and examination of prospective financial information

Question 23

International Standards on Auditing (ISAs):

Answer 23

• introductory material and definitions
• objectives
• requirements
• application and other explanatory material (including appendices)

Question 24

Stages of an audit

Answer 24

obtaining the engagement -> planning -> performing procedures -> review and completion -> reporting

Question 25

Overall objectives of the auditor

Answer 25

• to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework;
• to report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings.

Question 26

the auditor must:

Answer 26

• comply with relevant ethical requirements;
• plan and perform the audit with professional scepticism;
• exercise professional judgement
• obtain audit evidence that is both sufficient and appropriate, from which reasonable conclusions may be drawn, on which the auditor’s opinion is then based.

Question 27

Professional scepticism:

Answer 27

It is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

Question 28

Professional judgement:

Answer 28

It is the application of relevant training, knowledge and experience in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.

Question 29

This requires the auditor to be alert to:

Answer 29

• audit evidence that contradicts other audit evidence obtained
• information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence;
• conditions that may indicate possible fraud
• circumstances that suggest the need for audit procedures in addition to those required by ISAs.

Question 30

Professional judgement is required in the following areas:

Answer 30

• Materiality and audit risk
• Nature, timing and extent of audit procedures
• Evaluation of whether sufficient appropriate audit evidence has been obtained
• Evaluating management’s judgements in applying the applicable financial reporting framework
• Drawing conclusions based on the audit evidence obtained

Question 31

Factors facilitative of professional scepticism

Answer 31

• Characteristics of the audit team, including:
- Relevant technical or analytical skills
- Open-mindedness, and the capacity to notice facts which are inconsistent with expectations
- Independence
- Confidence and persistence to challenge management and to follow things through
- Knowledge of client and industry
• Provision of training relevant to the type of engagement eg, for the particular industrial sector
• Review procedures within the audit team, and the presence of external review
• Partners and managers actively leading the audit team, and being accessible to other staff during the audit
• A culture within the audit firm which emphasises the importance of scepticism, and of making difficult audit judgments
• The embedding of scepticism within the firm’s training and competency frameworks, used for evaluating and rewarding performance

Question 32

Factors hindersome of professional scepticism

Answer 32

Characteristics of the audit team, including:
- Lack of relevant technical or analytical skills
- Excessive trust in the client, and in the explanations given by client staff
- Timidity and a lack of assertiveness
- Lack of sufficient audit experience for the tasks allocated
• A checklist approach to audit procedures, in place of a more fundamental interest and understanding